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    Legislative Jeopardy

    Mar 16 • Economic History, Regulation • 214 Views

    Between 1932 and 1934, the Senate’s Pecora Commission, named after its general counsel, amassed 12,000 pages of testimony.  Its focus was the impact of stock exchange practices on banking, securities, and commerce.  Subsequent major financial legislation was based on the work of the Pecora Commission.

    Fast forward to 2009 when the Financial Crisis Inquiry Commission (FCIC) was created by The Fraud Enforcement and Recovery Act.  Similar to Pecora, its mission is to investigate a financial crisis: the panic of 2007. With its report due during December, 2010, the commission has begun its hearings.

    A question. We heard yesterday that the Senate Banking Committee, led by Senator Dodd, has proposed 1336 pages of legislation to prevent the panic of 2007 from recurring. If the FCIC has just begun its investigation, why is there a major legislative proposal preceding its feedback? 

    Does this approach sound like the tv game show, Jeopardy?

    The Economic Lesson

    The federal government guides our economy in three basic ways: fiscal policy (spending, borrowing, taxing), monetary policy (supply of money and credit) and regulatory policy.

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    Unintended Consequences

    Mar 15 • Regulation, Thinking Economically • 211 Views

    New rules might not always have the results regulators expect.  Starting on April 29, any airplane that sits on the tarmac for longer than 3 hours will be fined up to $27,500 per passenger.  For a Boeing 737, that could mean $4 million.  Continental’s CEO responded, “Here’s what we’re going to do: We’re going to cancel the flight.” And Delta and Jet Blue, concerned about a closed runway at New York’s JFK, asked for temporary exemptions.  The goal of the rule? To help passengers.  The result? Perhaps canceled flights that do more harm than good.

    Here, let’s think economically.  The primary goal of every business is to maximize profits.  If large fines seem imminent, firms will try to avoid them.  It appears that the Continental reaction is not what the DOT had in mind.  Still, we cannot be sure of the airlines’ profit maximizing response until after April 29.

    The Economic Lesson

    Thinking of the impact of a new rule returns us to incentives.  The incentives that new rules create will determine their success.

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    Roads to Prosperity

    Mar 14 • Developing Economies, Government, Macroeconomic Measurement • 239 Views

    In Part 1 of the Teaching Company course, “America and the New Global Economy,” Professor Timothy Taylor discusses the origination of the euro. Four goals he says were sought: free movement of people, goods, services, and capital.  Central especially to people and goods moving from country to country was not only a common currency but also roads.
    So, I returned to the Google World Bank statistics site to check out the proportion of European roads that were paved.  Starting with the world, I discovered that the overall average in 2000 was 36.3 percent.  Then, I added the original 12 eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Neatherlands, Portugal, and Spain.  Seven nations were at 99 percent or higher!  Only one was close to 60 percent.  Which ones?  I suggest you go there to look.

     

    The Economic Lesson
    A transportation infrastructure is crucial for economic growth.  In the United States, we started with roads, soon had a canal infrastructure, and then saw a railroad network develop. A eurozone goal, free movement across varied economic regions, was achieved in the United States long before the end of the 19th century.

     

     

     

     

     

     

     

     

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    Statistical Fun

    Mar 13 • Developing Economies, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy • 231 Views

    Reading that China might be concerned with an annual 3.5 percent inflation rate, I wondered how that compared to other countries and the world.  At a Google site with World Bank data, not only did I get some answers, but I had some fun.  Graphically, this site lets you compare data between countries, among countries, and with the overall world rate.  For example, with inflation, I first discovered a world rate of 8.06 percent (2008) and then added China and saw that in 2008, it was not far from the world statistic.  Then, I started to have some fun by adding Zimbabwe.  The graph looked amazing.  With the world zigzagging rather consistently, Zimbabwe, by contrast, goes vertical in 2003!

    I suggest taking a look.

    The Economic Lesson
    Inflation matters. A typical goal of monetary authorities is price stability which means close to zero inflation.  When prices are not stable, businesses have difficulty planning ahead, wages rapidly lose purchasing power, and interest rates soar because lenders would otherwise lose money.  As a self-fulfilling prophecy, inflationary expectations build unless a central bank such as the Federal Reserve controls the upward spiral.


     

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    Icemen and Pinsetters

    Mar 12 • Innovation, Labor, Macroeconomic Measurement, Tech • 291 Views

    In a wonderful story, NPR looked at “The Jobs of Yesteryear.”  Among those they discussed were pinsetters, elevator operators, icemen, and lamplighters. For each one, while technology made the occupation obsolete, the economy benefited with a higher GDP and a better standard of living.

    More specifically…

    In bowling alleys, during the beginning of the 20th century, a pingirl or a pinboy would have been stationed near the gutters waiting to pick up and reset the the pins after they were knocked down.    As late as the 1940s, you could still find pinsetters.

    Manually driven, the first elevators were operated by men and women who controlled the levers and “drove” the lift.  Even when push buttons were first used, because people could not stop at multiple floors, they still needed operator driven elevators.  (Unable to stop in between, each trip went from one floor to a selected destination.) Around 1950, the need for elevator operators began to dwindle.

    How to keep ice boxes cold before the electric refrigerator became commonplace?  Hauling 25-100 pound chunks of ice, the iceman came to neighborhoods several times a week.  During the 1940s, icemen became obsolete.

    And finally, in 1900 or so, in NYC, lamplighters were supposed to light 200-300 gas streetlights an hour.

    The Economic Lesson

    Hearing about obsolescence, economists would cite structural change.  Used economically, structural refers to the building blocks of an economy.  When the basic building blocks change, economic life is transformed.  Indeed, with the arrival of such new technology as electricity, the auto, and the transistor, we had progress as a plus and structural unemployment as a minus until those workers were retrained with skills that were more suited to the new economy.

     

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